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European MMFs investing in longer-dated non-bank assets, says Fitch

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European money market funds are reallocating their portfolios towards longer-dated assets issued by highly-rated supranationals, government agencies, sovereigns and corporates, while maintaining high overnight liquidity, amid sharply declining yields, according to a report from Fitch Ratings.



However, MMFs’ strong demand for such assets is still far from being satisfied given limited short-term market supply.

To preserve MMFs’ yield in the current ultra-low short-term market rate environment, while maintaining their conservative investment strategy, fund managers have demonstrated a growing appetite for longer-dated assets issued by highly-rated quasi-sovereigns, and to a lesser extent, sovereigns and corporate issuers.

The extension of average portfolio maturity has nevertheless been limited in 2012 so far, as MMFs’ liquidity has remained around the high levels observed since mid-2011, with average daily liquidity relatively stable at about 30 per cent of portfolios.

The average portfolio allocation to quasi-sovereigns reached 10 per cent at end-October, versus less than two per cent before August 2011, the most largely held entities being Erste Abwicklungsanstalt, FMS Wertmanagement, KfW, CDC, CADES, ACOSS, the European Investment Bank and the European Financial Stability Facility / European Stability Mechanism.

Fitch also notes MMFs’ increased appetite for collateralised exposures, which has materialised so far almost exclusively through repurchase agreements and ABCPs.

Covered bonds with below one year residual maturities and some form of collateralised commercial papers (e.g. repo-backed) are among the possibilities that are the most widely contemplated by MMFs.

However, this strong demand for highly-rated sovereigns, quasi-sovereigns, corporates and collateralised assets is still far from being satisfied given the limited short-term market supply, notably in euro and sterling. As such, MMFs still retain a large exposure to the banking sector (77 per cent), albeit slightly reduced from a year before (82 per cent). In this context, MMFs could prove natural buyers of so-called short-term Eurobonds (or euro Treasury-Bills), should they be issued one day.

Fitch’s analysis is based on European MMFs rated by the agency, which represented EUR323bn at end-October 2012. Total European MMFs’ assets under management stood at EUR1.08trn at the same date.

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